Lebanon’s Circular 331: The birth of an industry

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In August 2014, Banque du Liban (the Central Bank of Lebanon, abbreviated as BDL) issued Circular 331 with the aim of injecting 400 million dollars into the Lebanese ‘knowledge economy’ via investments made by Lebanese banks. Three years later, the planned ecosystem is gradually taking shape, despite certain missteps.

A brief recap

The main objectives of 331 are eventually reversing Lebanon’s brain drain, as well as stimulating entrepreneurship by ensuring all commercial banks’ investments in knowledge economy, either through direct startup equity investment or indirect startup support entities, are guaranteed by BDL. This means that if a startup goes bankrupt, BDL will reimburse the bank that funded it to the tune of 75 percent of its investment. (The bank would have to settle for a loss of only 25 percent.) Originally, it was stipulated that the banks can invest up to three percent of their total capital holdings in local startups, either via funds or directly — hence the $400 million estimation. However, amendment 419 (April 2016) revised the figure to four percent, increasing the potential investment to $600 million.

The current status

So far, $300-$320 million has been raised. About half this amount has been invested, with the beneficiaries numbering over 40 startups. The influx of money has spurred the creation of new venture capital funds which cover the various levels of funding (seed, growth, and series B), new accelerators, and new co-working spaces. Co-investments have been made: Azure fund and MEVP both invested in Washed and Found; Berytech co-invested with MEVP in Scriptr and Mobinets; and MEVP and LEAP both invested in Bookwitty, though at different times. “Circular 331 has the potential to be the locomotive of the Lebanese economy,” said Paul Chucrallah, Berytech fund manager. At Beirut’s annual Arabnet conference in March this year, BDL Governor Riad Salameh announced that the industry had contributed $1 billion to the GDP of Lebanon and created thousands of jobs, though it’s not clear where these figures come from. The fact that Beirut Digital District, where such startups are concentrated, is almost full and has even begun expanding, indicates that the endeavor has met with an initial measure of success.

The startup environment in Lebanon is getting more dynamic with an increasing number of creative concepts (Image via Wamda)

Attracting the diaspora

Lebanese talent overseas, that associated with venture capital and accelerators in particular, is making its way home: Sami Abou Saab, CEO of Speed, came back from Montreal, Canada; Nizar El Hachem, founder of Azure Fund, was previously based in Dubai, UAE; and the Leap Ventures team has mainly been headhunted from abroad. Startups have witnessed a similar phenomenon. According to Abou Saab, of the 18 startups at Speed, three to five have diaspora members. In the view of Leap Ventures partner Hervé Cuviliez, one of Lebanon’s main attractions is its affordability: “There is a decent living environment here, and taxes are still lower than in Europe. Sure, you have to pay two bills for electricity and water, etcetera, but all in all it’s still cheaper here.”

Dearth of talent

There remains the problem of a shortage of technical talent. Speed’s accelerator, for example, doesn’t always fill its capacity of 10 startups per batch. “This round we’re having nine startups, which is better than the previous batches. But we still don’t have enough good ones,” explained Abou Saab. “It’s still very hard to find good CTOs and good tech experts in very specialized segments like artificial intelligence, cryptography, etcetera,” concurred Berytech’s Chucrallah. The industry is tackling the problem by investing in specialized training for students and engineers alike. Coding academies like SE Factory, which provides three-month training to developers, are being set up. Bigger companies like Bookwitty are partnering with universities to train and recruit engineers. Slowly but surely, the ecosystem is taking off. “We got a couple of PhDs in this batch at Speed, which is good,” noted Abou Saab.

Red tape

Another problem that the industry faces is obsolete regulation. “The code of commerce needs to be revised,” said Walid Mansour, partner at MEVP. The list of items that could use an overhaul is seemingly endless: it’s still very complicated to shut down a company, convertible notes and preferred shared systems do not function as smoothly as they should, and the minimum requirement of capital to set up an SAL ($20,000) is too high for a lot of startups. Companies and venture capitalists work around these obstacles, but they spend a lot of time doing so. Work regulations also complicate matters. “The best developers in the world are Indian,” observed Speed’s Abou Saab, “and we can’t bring them to Lebanon because they cannot come except on a domestic worker visa.” Cyril Hadji-Thomas, co-founder and CEO of Bookwitty, which recently raised $10 million, added that the banking system is behind the times: “When you have a business that’s running, you need debt. But no bank gives you loans here. They ask for personal guarantees.”

Forming a lobby group

Venture capitalists are getting organized to tackle all these problems. Indeed, an association of VCs is in the pipeline. “We’ve been working on it for a year and a half. Papers have been ready for five months now,” said Berytech’s Chucrallah. “An association is a good thing,” said Fadi Bizri, a partner at B&Y Ventures. “We need to talk in one voice, lobby, show the public that 331 is working, [and] compile reports.” What might have given an unexpected boost to the creation of the association, despite long-term and sometimes very public rivalries between funds and fund managers, is amendment 452, which BDL passed in February 2017. This amendment endangers 331 by forbidding any expense outside Lebanon. “The problem is that the amendment doesn’t make the distinction between investment abroad and expenses abroad. How are we supposed to pay Google Ads then?” asked MEVP’s Mansour. Alarmed by the amendment, VCs convened and lobbied for a change. Their efforts bore fruit; 452 was superseded fewer than six weeks later by amendment 454, which allows expenses outside Lebanon for services and equipment not found in the country.

Staying positive

All in all, industry mavens remain cautiously optimistic: “The tech scene is growing because there is a lot of money being injected [into] an environment [that’s] relatively sophisticated,” explained Bizri. “It’s been 10 years that Lebanon has been [into] entrepreneurship. We had VCs, accelerators, entrepreneurs before the money got injected. And the fact that there is a lot of money is a good thing because it made the news. Three years ago, people didn't know that Lebanon had something in tech.”

The ecosystem as a whole still needs at least two to three years to become a bona fide success story, and to prove that 331 is effective. It has reached a critical point, according to Cuviliez, the LEAP Ventures partner, because “like a startup, you need to decide if you believe in your product or not.” For many, that decision has already been made. A confident Cuviliez most likely speaks for a good number of his peers when he asserts: “We believe it is working.”